Insurance-Linked Securities - Thought Leadership

Insurance-Linked
Securities
Fourth Quarter 2013 Update
Empower Results®
Insurance-Linked Securities 2013: Fourth Quarter Update
Fourth Quarter 2013 Catastrophe Bond Transaction Review
New catastrophe bond issuance for the calendar year 2013 finished strongly at USD7.5 billion. As of December 31, 2013,
USD20.3 billion of total limit was outstanding, the highest level in the market’s history. Sixteen transactions closed during
the second half of 2013. Market pricing conditions for insurance-linked securities remained in line with the historical lows
seen in the first half of 2013, as strong demand for cat bonds continued among sponsors and investors.
During the second half of 2013, several new sponsors entered the market including the Metropolitan Transportation
Agency, AXIS Specialty, American Modern Insurance Group, Inc. ("American Modern"), QBE Insurance Group (“QBE”)
and Achmea Reinsurance Company N.V. ("Achmea"). A broad range of risks was offered to investors including Australia
earthquake and cyclone, Japan earthquake and Europe windstorm, as well as U.S. perils.
The table below summarizes the terms of the deals that closed during the second half of 2013:
Third and Fourth Quarter 2013 Catastrophe Bond Issuance
Beneficiary
Issuer
Series
Class
Size
(millions)
Series 2013-1
Class A
€ 280
Covered Perils
Trigger
Rating
Expected
Loss
Interest
Spread
0.82%
2.75%
8.00%
Third Quarter 2013
Groupama S.A.
Green Fields II Capital
Limited
Swiss Reinsurance Company Ltd.
Mythen Re Ltd.
Series 2013-1
Class B-1
Renaissance Reinsurance Ltd.
Mona Lisa Re Ltd.
Series 2013-2
Class A
American International Group
Tradewynd Re Ltd.
Series 2013-1
Metropolitan Transportation
Authority
MetroCat Re Ltd.
FR Wind
Industry Index
BB
$100
US HU
Industry Index
Not rated
2.98%
$150
US HU & EQ
Industry Index
BB-
2.08%
7.30%
Class 1
$125
US/CB HU & US/CAN EQ
Indemnity
B+
1.49%
8.25%
Series 2013-1
Class A
$200
Northeast Storm Surge
Parametric Index
BB-
1.68%
4.50%
AXIS Specialty Limited
Northshore Re Limited
Series 2013-1
Class A
$200
US HU & EQ
Industry Index
BB-
2.17%
7.25%
Zenkyoren
Nakama Re Ltd.
Series 2013-1
Class 1
$300
JP EQ
Indemnity
BB+
0.90%
2.75%
SCOR Global Life SE
Atlas IX Capital Limited
Series 2013-1
Class B
$180
US Mortality
Index
BB
0.92%
3.25%
Class A
€ 185
Industry Index
0.95%
2.60%
€ 165
EU Wind
BB-
Class B
B+
1.56%
2.90%
Class A
$300
US HU & EQ, EU Wind
Industry Index
Not rated
2.59%
7.40%
Class 1
$80
Indemnity
14.23%
20.00%
$70
US HU, EQ, ST, WS, CAL WF
Not rated
Class 4
BB-
1.80%
5.25%
Class 1-A
$100
1.28%
6.25%
1.26%
6.25%
Fourth Quarter 2013
AXA Global P&C
Calypso Capital II Limited
Catlin Insurance Company Ltd.
Galileo Re Ltd.
Series 2013-1
United Services Automobile
Association
Residential Reinsurance
2013 Limited
Series 2013-II
American International Group
Tradewynd Re Ltd.
Series 2013-2
$140
€ 40
EU Wind
Indemnity
US HU
Indemnity
Series 2013-1
Class A
American Modern
Series 2013-1
Class A
$75
Class A
$32
$75
Argo Re, Ltd.
Loma Reinsurance
(Bermuda) Ltd.
Series 2013-1
Class B
Class C
$65
QBE
VenTerra Re Ltd.
Series 2013-1
Class A
$250
Total Closed During Q3 and Q4
US/CB HU, US, ST, SCS,
US/CB/CAN EQ
US EQ, AU EQ, AU CY
Not rated
1.60%
7.00%
Not rated
1.35%
3.25%
Not rated
0.57%
3.50%
3.94%
9.75%
Indemnity,
Industry Index
Not rated
5.26%
12.00%
8.15%
17.00%
Indemnity
BB
1.34%
3.75%
$3,498
* All $ figures are USD unless otherwise stated
Legend
Source: Aon Benfield Securities, Inc.
AU – Australia
CAL – California
CAN – Canada
CB – Caribbean
2
Indemnity
$160
Class 3-B
Achmea Reinsurance Company N.V. Windmill I Re Ltd.
Queen City Re Ltd.
US/CB HU & US/CAN EQ
Class 3-A
FL – Florida
LA – Louisiana
MX – Mexico
NC – North Carolina
US – United States
CY – Cyclone
EQ – Earthquake
HU – Hurricane
ST – Severe Thunderstorm
WF – Wildfire
WS – Winter storm
Aon Benfield Securities
Fourth Quarter 2013 Catastrophe Bond Transaction Review
In the third quarter, Zenkyoren successfully sponsored
its first indemnity transaction. Nakama Re Ltd. provides
the insurer with USD300 million in coverage for Japan
earthquakes. SCOR Global Life SE sponsored its first nonproperty cat transaction. Atlas IX Capital Limited secured
USD180 million in capacity and provides coverage for
extreme mortality in the U.S.
In the fourth quarter, QBE came to market with its first
transaction, which provides indemnity coverage for U.S.
earthquakes, Australia cyclones and Australia earthquakes.
VenTerra Re Ltd. provides QBE with USD250 million in
capacity and closed at the low end of marketed guidance.
Also in the fourth quarter, Argo Re returned to the cat bond
market with its third issuance, Loma Reinsurance (Bermuda)
Ltd. The transaction provides the sponsor with U.S. multiperil coverage using a combination on industry index and
indemnity triggers.
The chart below shows catastrophe bond issuance by half
year since 2007:
Catastrophe Bond Issuance by Half Year
9,000
July-December
January-June
8,000
7,000
3,404
6,000
USD millions
3,498
2,692
5,000
4,000
2,625
232
2,842
3,000
4,976
320
2,000
2,011
3,973
2,650
2,510
1,000
1,460
3,588
1,757
0
2007
2008
2009
2010
2011
2012
2013
Source: Aon Benfield Securities, Inc.
Strong issuance volumes are expected to continue throughout 2014 with sponsors utilizing the catastrophe bond market
as core component of their risk transfer programs.
3
Insurance-Linked Securities 2013: Fourth Quarter Update
Aon Benfield ILS Indices
The Aon Benfield ILS Indices are calculated by Thomson
Reuters using month-end price data provided by Aon
Benfield Securities. Each ILS index posted increases for the
fourth quarter of 2013. The All Bond and BB-rated Bond
Indices were up 1.98% and 1.31% respectively, while the
U.S. Hurricane Bond and U.S. Earthquake Bond Indices
were up 2.06% and 1.04% respectively in the quarter. The
All Bond Index outperformed all comparable fixed income
benchmarks for the quarter; however it did not outperform
the strong performance seen in the S&P 500 index. Index
values for the fourth quarter of 2013 were similar, albeit,
slightly lower than those witnessed in the 2012.
For the full year 2013, all indices posted gains. The All
Bond, U.S Hurricane Bond and U.S. Earthquake Bond
indices outperformed 2012 returns. The BB-rated index
underperformed the prior year’s returns by 40 basis points.
The Aon Benfield All Bond and BB-rated Bond indices posted
returns of 10.87% and 7.11% while the U.S. Hurricane and
U.S. Earthquake Bond indices posted returns of 11.64%
and 6.85%, respectively. Returns for the All Bond Index
outperformed all comparable fixed income indices in 2013.
In the absence of severe catastrophic events, we would
expect 2014 to be another positive year as the market
broadens the spectrum of available risks and expands
coverage to lower layers of reinsurance coverage. We
expect a slight reduction in the mark-to-market increases in
2014 versus those witnessed throughout 2013 due to the
significantly lower spreads seen in 2013.
Aon Benfield ILS Indices1
Index Title
Return for Quarterly Period
Ending December 31
Return for Annual Period
Ending December 31
Aon Benfield ILS Indices
2013
2012
2013
2012
All Bond
Bloomberg Ticker (AONCILS)
1.98%
2.08%
10.87%
9.75%
BB-rated Bond
Bloomberg Ticker (AONCBB)
1.31%
1.40%
7.11%
7.51%
U.S. Hurricane Bond
Bloomberg Ticker (AONCUSHU)
2.06%
2.28%
11.64%
10.45%
U.S. Earthquake Bond
Bloomberg Ticker (AONCUSEQ)
1.04%
1.55%
6.85%
4.99%
3-5 Year U.S. Treasury Notes
-0.40%
-0.01%
-0.98%
1.56%
3-Year U.S. Corporate BB
1.82%
2.03%
4.86%
7.62%
S&P 500
9.92%
-1.01%
29.60%
13.41%
ABS 3-5 Year, Fixed Rate
0.47%
0.67%
0.36%
6.36%
CMBS 3-5 Year, Fixed Rate
0.63%
1.86%
0.90%
10.81%
Benchmarks
Source: Aon Benfield Securities Inc., Bloomberg
The 3-5 Year U.S. Treasury Note Index is calculated by Bloomberg and simulates the performance of U.S. Treasury notes with maturities ranging from three to five years.
1 The 3-Year U.S. Corporate BB+ Index is calculated by Bloomberg and simulates the performance of corporate bonds rated BB+ on a zero coupon basis. Zero coupon yields are derived by stripping
the par coupon curve. The maturities of the BB+ rated bonds in this index are three years.
The S&P 500 is Standard & Poor's broad-based equity index representing the performance of a broad sample of 500 leading companies in leading industries. The S&P 500 Index represents price
performance only, and does not include dividend reinvestments or advisory and trading costs.
The ABS 3-5 Year, Fixed Rate Index is calculated by Bank of America Merrill Lynch (BAML) and tracks the performance of U.S. dollar denominated investment grade fixed rate asset backed
securities publicly issued in the U.S. domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, a fixed rate coupon, at least one
year remaining term to final stated maturity, a fixed coupon schedule, and an original deal size for the collateral group of at least $250 million.
The CMBS 3-5 Year, Fixed Rate Index is calculated by BAML and tracks the performance of U.S. dollar denominated investment grade fixed rate commercial mortgage backed securities publicly
issued in the U.S. domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, at least one year remaining term to final maturity, a
fixed coupon schedule, and an original deal size for the collateral group of at least $250 million. The performance of an index will vary based on the characteristics of, and risks inherent in, each
of the various securities which comprise the index. As such, the relative performance of an index is likely to vary, often substantially, over time. Investors cannot invest directly in indices.
Past performance is no guarantee of future results.
4
Aon Benfield Securities
ILS Sales and Distribution
The ILS market remained strong as 2013 came to a close.
Investors secured USD1.8 billion in the fourth quarter and
USD3.5 billion in the second half of 2013 in new issuance.
Strong investor demand continued with the diverse range
of transactions o ered. Many transactions increased from
the announced issuance size and priced at the low end of, or
below, interest spread guidance. During the fourth quarter,
secondary market buyers showed interest in accumulating
relatively high yielding securities as well as short-dated U.S.
hurricane bonds.
Investors sourced a variety of peril types via primary issuance
during the second half of the year. Perils included extreme
mortality (Atlas IX Capital Limited), Australia cyclone and
earthquake (VenTerra Re Ltd.), Japan earthquake (Nakama Re
Ltd.), Europe windstorm (Calypso II Re Limited, Green Fields
II Capital Limited, Windmill I Re Ltd.). Demand for diversifiers
was evident throughout the second half as each diversifying
peril issued during the period priced at the low end, or
below, initial guidance.
Traditional markets responded to the competition driven by
spread compression in the ILS market with rate decreases,
as well as, enhanced terms and conditions. A competitive
environment between the traditional and ILS markets is
expected to continue into 2014.
Given the amount of bonds issued with relatively low
coupons throughout the year, investor demand for highyielding transactions remains strong. The fourth quarter saw
the issuance of several bonds with higher coupons. Loma
Reinsurance (Bermuda) Ltd. Series 2013-1, covering U.S.
multi-peril, included three tranches with yields ranging from
9.75% for the Class A notes to 17.00% for the Class C notes.
The highest yielding transaction of the year was also issued
during the fourth quarter. The Residential Reinsurance 2013
Limited Series 2013-II Class 1 notes, covering U.S. multi-peril,
paid a coupon of 20.00%. Strong demand for these notes
pushed the interest spread below the modeled sensitivity
case attachment probability, a first for the market.
The secondary market was active during the fourth quarter,
even with yields compressing and increases in the o ering
size of new issuances. October and November were
particularly active for trading as investors looked to round out
portfolios, paying a premium to secure bonds shortly after
issuance. In December, trading slowed as buyers focused
on the multiple new issuances o ered before year end.
New capital continuing to be allocated to ILS investment
mandates points to a positive outlook for increasing the
breadth of the ILS market.
5
Insurance-Linked Securities 2013: Fourth Quarter Update
An Interview with Yoichi Azuma,
General Manager of Reinsurance Office, Zenkyoren
1. Please tell us about the lessons you have
learned from your experience with the
Great East Japan earthquake.
The Great East Japan earthquake caused unprecedented
damage not only to Zenkyoren but to Japanese insurance
industry as a whole. As a result, we have re-recognized
the importance of being well-prepared for such an event
of unimaginable scale, as well as the importance of strong
and effective Business Continuity Planning. It was fortunate
we had a well-structured risk management program
with both traditional reinsurance and a cat bond so that
we were able to utilize the insurance proceeds from the
program to pay out insurance claims promptly without
fail. We would like to express our warmest gratitude to the
market participants for the support they provided.
東日本大震災は未だかつてない規模で甚大な被害を本会および日
本市場にもたらしました。
この災害を通して我々は有事への備えと災害後のBCPプランの重要
性を痛感しています。
幸い、リスク管理の一環として伝統的再保険とキャットボンドを実施
していたため、当該再保険金を契約者への支払財源に当てることが
できました。
この場を借りて関係各社に御礼と感謝を申し上げます。
2. What were the lessons you learned
from the Muteki cat bond
Since we used the parametric index as a trigger for the
Muteki cat bond, we were able to swiftly recover the full
amount within three months after the earthquake. This in
turn enabled us to pay out the insureds in need without
much delay.
The Muteki cat bond was designed so as to rely on peak
ground acceleration observed at Kyoshin Network (K-net)
stations to determine whether a loss had triggered. As the
damage from the tsunami was especially significant for
the Great East Japan earthquake, we experienced issues
where the observed parameters could not be reported
soon after the event because some observation stations
were damaged or swept away by the tsunami. This
experience gave us a lesson and we are now fully aware
of the importance of carefully designing a backup plan
so that a parametric index cat bond behaves as expected
at the time of loss.
キャットボンドムテキでは、パラメトリックトリガーを採用していたた
め、震災発生後、約３ヶ月という非常に短期間で再保険回収を実施
することが出来ました。
この回収金は即座に被災されたお客様への支払原資とされ、大変有
意義なものとなりました。
災害についてお話しすると、東日本大震災の特徴の一つとして津波
被害が挙げられます。我々は回収指標を事前に決定された各観測地
点でのPGA値としていましたが、当該観測地点の観測機器が津波に
より流されてしまったり、破壊されてしまったものがあり、一定期間
計測値が報告されない事態が発生しました。これを受けて、そのよう
な最悪の事態まで想定したバックアッププランを検討することの必
要性を再認識し、今後の課題としています。
6
Aon Benfield Securities
3. What was the rationale for your shift
to use an indemnity structure?
We’ve been fully satisfied with the parametric loss trigger
we utilized in our previous transactions in terms of the
transparency of the trigger and rapid settlement of the
transactions. On the other hand, there is always certain
amount of basis risk present and mitigating this risk is a huge
part of the tasks involved in issuing parametric cat bonds.
For this reason, we decided to choose an indemnity trigger
with minimal basis risks, which in turn offers more flexibility
to fit within our traditional reinsurance program.
従来採用してきたパラメトリックトリガーも透明性、再保険金回収
の迅速性の観点では十分満足できるものでした。
ただしパラメトリックを採用する場合は、ベーシスリスクは常につ
いてまわる課題であり、我々はこのリスクの最小化を検討し続けて
います。今回のインデムニティトリガーは、このベーシスリスクをよ
り少なくすることができるため、新たに採用することを決めました。
4. What would you like to see from ILS investors in
order to make alternative capital solutions more
attractive for your reinsurance strategy?
We always wish to build stable long-term relationships
with our reinsurance partners in traditional programs.
We value the trust we have with reinsurers greatly and are
hoping to enhance the established business relationships
further. This, we think, is the core nature of our business
and we do our business based on this philosophy. As the
ILS market has steadily been expanding and building up
its history, we expect to see many more stable capacity
providers coming into the market with whom we are able
to build long-term relationships in a similar manner to the
traditional partners.
5. In your opinion, what is the right balance
between traditional reinsurance capacity
and alternative capacity?
We are continuously looking for alternative ways of
transferring risk in order to establish the optimal risk
management solution. As we see a significant growth
of the ILS market in recent years, we believe that the
use of capital markets as a source of additional capacity
is becoming increasingly important for us.
On the other hand, as mentioned earlier, the relationships
we have with traditional reinsurance partners are very
strong and we greatly value their support. We are hoping
to build even stronger relationships with them.
We will continue our effort to optimize our risk
management program by combining the traditional
market with capital markets solutions, keeping traditional
reinsurance as our core strategy and benefitting from the
ever growing ILS market at the same time.
我々は適正なリスク管理の観点から、常に代替的なリスク移転手法
を検討しています。
キャットボンド（ART）市場の進化、拡大は近年目覚ましいものが
あり、重要性が高まってきています。
一方で我々と伝統的再保険パートナーとの関係は深く、彼らのパフ
ォーマンスにも非常に満足しており、さらなる関係強化を望んでい
ます。
これからはリスク管理のコアである伝統的再保険とILS市場をうま
く組み合わせ、最適なプログラム構築を考えていくことになるでし
ょう。
まず、我々は毎年実施している伝統的再保険のパートナーには、長
期安定的な取引を継続して欲しいと常々要望しています。また、その
ような相手先との取引を望んでいます。これは全共連のネイチャー
であり、我々が最も大事にしている理念であります。
このILS市場も徐々に拡大してきており、歴史も積み重ねてきてい
ることから、さらに安定したキャパシティの提供者が増えることや
長期的視点に立ったパートナーが増えることを望んでいます。
7
Aon Benfield
200 E. Randolph Street
Chicago, Illinois 60601
t+1.312.381.5300
f+1.312.381.0160
aonbenfield.com
Aon Benfield Securities, Inc. and Aon Benfield Securities Limited (collectively, “Aon
Benfield Securities”) provide insurance and reinsurance clients with a full suite of
insurance-linked securities products, including catastrophe bonds, contingent capital,
sidecars, collateralized reinsurance, industry loss warranties, and derivative products.
As one of the most experienced investment banking firms in this market, Aon Benfield
Securities offers expert underwriting and placement of new debt and equity issues,
financial and strategic advisory services, as well as a leading secondary trading desk.
Aon Benfield Securities’ integration with Aon Benfield’s reinsurance operation expands
its capability to provide distinctive analytics, modeling, rating agency, and other
consultative services.
Aon Benfield Inc., Aon Benfield Securities, Inc. and Aon Benfield Securities Limited
are all wholly-owned subsidiaries of Aon plc. Securities advice, products and services
described within this report are offered solely through Aon Benfield Securities, Inc.
and/or Aon Benfield Securities Limited.
© Aon Benfield, LLC, 2014. All rights reserved.
This document is intended for general information purposes only and should not be
construed as advice or opinions on any specific facts or circumstances. The comments
in this summary are based upon Aon Benfield’s preliminary analysis of publicly available
information. The content of this document is made available on an “as is” basis,
without warranty of any kind. Aon Benfield disclaims any legal liability to any person or
organization for loss or damage caused by or resulting from any reliance placed on that
content. Aon Benfield reserves all rights to the content of this document.
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